W

(By Richard Holway 2.00pm 17th May 09) So far this year I have written about U, L and even Y-shaped economic downturns and recoveries. In all those articles I was referring to the UK economy in general and the UK SITS market in particular. I’ve been totally consistent for over a year now in believing that we won’t see growth returning until the middle of 2010. Nothing I have read from the BoE or the IMF this week would make me change my mind.

It has been interesting to see how Eurozone countries – Germany in particular – are being even harder hit that the UK. “We all drink out of the same soup bowl”. Germany might well have avoided the excesses of our own financial services sector. But it was those self-same evil city dealers that bought the BMWs and Porches that are the mainstay of the German manufacturing sector.

But as my colleague Anthony Miller keeps reminding me, stock markets are different to markets in general. Stocks are different to companies. As I have been reporting each month this year, the FTSE UK SCS Index has just consistently powered ahead; possibly anticipating a recovery somewhat faster than me, the BoE or the IMF. Indeed it is still up 29% YTD. Conversely, the FTSE100 fell like a stone in the first two months of 2009 – it was 20% lower YTD by 6th March 09 – before staging a pretty remarkable recovery – up 25% since. But the FTSE100 is still down 2% YTD.

Many observers are now suggesting that this was just a ‘Bear Rally’ and that what we are seeing is a “Classic W”.

Last week the FTSE100 fell 3.4% and the FTSE SCS Index was down 1.3%. NASDAQ also fell 2.5%. All adding to the view that we could well be in the middle of the W.

Fortunately it is not our job to forecast where either indices are now headed. But I will repeat the conclusion from IndustryViews published a couple of weeks back (available only to subscribers). Over the medium to long term, the FTSE100 and the FTSE SCS Indices perform together. So far this YTD, for the first time since Q1 2000, they have gone quite separate ways. I am not suggesting a tech crash like we saw in 2000. But, if historic trends are correct, we will see some convergence in the Indices by the end of the year.

Footnote – Having written this article, I’ve just read How to profit whatever the shape of the recovery in today’s Sunday Times. It has V, W, double-W, U and L-shaped recovery scenarios!